Coke moving into Middle East markets

The soft-drink giant strikes a $980 million deal with a Saudi soda company.

By Benzinga Dec 14, 2011 4:37PM

By John Thorpe, Benzinga Staff Writer


Coca-Cola (KO) announced Wednesday that it has reached an agreement to buy half of Saudi Arabia's Aujan Industries' drinks business.


The deal, valued at $980 million, gives the U.S. beverage maker a significant inroad to the growing food and beverage markets in the Middle East and North Africa. The company said in October that it wanted to move into those markets wherever it was strategically possible to do so. Now, it seems to have that foothold.


The deal will give Coca-Cola 50% of the Aujan entity that holds the rights to Aujan-owned brands, and 49% of Aujan's bottling-and-distribution company. This makes Coke and Aujan a huge partnership in the Middle East market.


This is not the first time this year that Coke has reached out to overseas facilities and companies to build its international portfolio. In September, the company announced a 17 million euro investment in France's Les Pennes-Mirabeau facility.


Coke also announced last month that it was investing $2 billion in India, where it hopes to capture market share in a densely populated, fast-growing country. In India, Coke is competing against Pepsi (PEP) for market share.


In the Middle East, Coke has taken the lead ahead of Pepsi and other soda makers.


This transaction represents the largest-ever investment by a multinational firm in the Middle East's fast-moving consumer goods sector, reflecting the strength of Aujan's operations. Aujan holds a top-three position in the beverage industry in every country in which it operates, and is one of the top 100 companies in Saudi Arabia with total annual revenue exceeding $850 million.


ACTION ITEMS:

Bullish:
Traders who believe that the Middle East is fertile ground for food and beverage growth might want to consider the following trades:
  • Buy Coke. Coke's stock, already widely considered a blue-chip investment, might be even more valuable if the company can capture customer loyalty across the Middle East. This new deal might take them there.
  • Buy Pepsi. If Coke can do it, and do it well, it would make sense that its main competitor might also want in on the action. Even if Coke stays No. 1, there might be an opportunity to get in on Pepsi before it makes a big move in the region (assuming it does make such a move, of course).
  • Consider fast food stocks, such as McDonalds (MCD), that might also profit in the region.
Bearish:
Traders who believe that the Middle East move is a bad idea may consider alternative positions:
  • Invest in military supply companies, such as Boeing (BA) and Lockheed Martin (LMT). Fundamentalists in the region are only going to be upset by America's increasing footprint in the region, leading to the likelihood of more war. Missile and Jet makers such as those two could benefit.
  • If the move backfires, companies like the Dr Pepper Snapple Group (DPS) might benefit by remaining here in the states.
  • If Americans trend toward health consciousness AND the move overseas backfires, Coke could be in a bad spot. If so, consider companies that make more wholesome products, like Heinz (HNZ) and other juice-making stocks.
Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security.

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